PM End of Week Market Commentary - 1/23/2015

On Friday gold fell -8.00 to 1294.10 on moderately heavy volume, while silver dropped only -0.01 to 18.33 on moderately light volume. Gold sold off slowly for most of the day, dipping down sharply at around 1010 EST, but then rebounding slowly for the rest of the day. Silver outperformed gold.

This week, gold continued higher through the ECB QE announcement, but momentum appears to be slowing down, and gold may be ready for a rest after rallying perhaps $110 over the past three weeks. Silver has advanced right up to its 200 MA, but has been unable to close above it - the 200 MA appears to be acting as resistance.

Miners sold off Friday, with GDX down -3.03% on moderately heavy volume, while GDXJ was hit for -4.99% on moderate volume. The last 3 days of the week, mining shares have been underperforming gold itself, signaling to me a possible weakening in the PM rally.

For the week, gold rose +13.80 [+1.08%], silver was up +0.54 [+3.04%], GDX fell -1.90% and GDXJ -4.40%. The miner underperformance is clear to see. Silver is doing surprisingly well, all things considered.

The USD

The buck had a massive week, rallying +2.25 [+2.42%] driven primarily by the QE annoucement by the ECB on Thursday. Money continues to flee the Eurozone, with the Euro dropping a huge -2.88% on the week. Other big losses vs the buck include the Canadian Dollar [-3.58%] and the Aussie Dollar [-3.75%], although those moves are probably more commodity-related.

Vertical moves like this dollar move typically don't last too long. From the Euro perspective, it looks like capitulation. The Euro closed the week at 112.28, a level last seen in 2003.

With a week perspective, it sure looks like the SNB was right to bail out of the EUR/CHF peg. How much more money would they have had to print to retain the peg? When Dragi prints, so must they, increasing that stack of steadily dropping Euro.

Miners

The miners lost ground this week, with GDX selling off after closing briefly above its 200 MA. Senior miners still remain above their EMA-9, which is a positive sign, at least for now.

Juniors on the other hand are starting to look ill. On Friday, they broke below their EMA-9, which to me is a danger sign - not just for the junior miners, but for PM overall. Junior miners tend to lead PM higher in bull moves, and they are the canaries in the coal mine when the PM market starts to move lower.

EMA-9 breaks tend to lead to falling prices.

Note that this is from the "daily chart" perspective - if you look at the daily miner charts, you can see a 6-8 week cycle - and right now, we're about 5 weeks into the cycle. Based on the break of the EMA-9 by the juniors, I'm thinking that the miners could fall for the remainder of this cycle, however long it lasts.

If you look at the charts below, you can see how the GDXJ:GDX ratio is leading GDX:$GOLD in time - the first ratio peaked two weeks ago, while the second ratio peaked at the start of this week. What's more, the GDXJ:GDX ratio looks distinctively less healthy - it could not move above its 50 MA, unlike GDX:$GOLD which remains well above its own 50 MA.

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US Equities/SPX

SPX had a decent week, with the bulk of the move happening the day of the ECB QE announcement. SPX rose +32.40 [+1.60%] on the week.

Based on the strength of the move higher following the QE announcement, it appears SPX will probably retest the high of 2100, especially if the dollar continues its move skyward. However, on the longer term monthly chart the SPX momentum continues to wane.

A failed test of the 2100 high would be a potential double top pattern, which would need to be confirmed by a break below the recent 1984 low. A break to new highs says the current SPX uptrend (yes, we're still in an uptrend) remains intact.

Gold in Other Currencies

This week gold in Rubles took a rest, while gold was up in most other currencies. Our big golden winner this week was of course gold in Euros, driven primarily by a huge currency loss in EUR/USD. Gold in XDR did pretty well too.

Rates & Commodities

Bonds (TLT) rose again, up +1.19%, but failed to make a new closing high this week. On the daily chart, bonds look like they were taking a rest, mostly chopping sideways. Still, TLT remains above the EMA-9, and together with all the other averages, it look quite bullish.

JNK rose this week, up +0.54% confounding the junk bond/oil linkage. JNK closed every so slightly above its 50 MA at end of week.

The CRB fell, dropping -3.40% on the week, making yet another new low for this long, long, long commodity down cycle. I could talk about oversold levels and how price moves don't usually last this long, but it seems that commodities still just want to continue moving lower. Copper, for instance, had a dreadful week; it was off -5.22%. If its not one thing, its another.

Precious metals are the only commodity sub-group that are rising.

WTIC fell hard this week, down -3.64 [-7.40%] to 45.29. Part of the problem was a large inventory rise in the US (Thursday @ 1100 EST: Petroleum Status Report) due to refineries cutting back production. Oil has not made new lows yet. Emphasis on the yet. One consideration: the rising dollar will tend to cause commodity prices (priced in dollars) to fall, and this week the dollar did extremely well.

Physical Supply Indicators

* Premiums in Shanghai vs COMEX fell -6.95 to -0.07 over COMEX. Shanghai is now ever so slightly in discount. This is not surprising, as the usual pattern is for Shanghai to move into discount after gold rallies, and to move into premium after gold prices fall. What's more, delivery volumes have dropped off significantly.

The COT report was through Jan 20, when gold was trading at 1294.20 and silver 17.94.

In gold, Managed Money hoovered up +23.4k longs, and covered -4.0k shorts; this was a massive increase in new long exposure by Managed Money, likely stemming from the Euro de-peg by the SNB. This is exactly what we need to see to move gold prices steadily higher: hedge funds deciding they want to buy COMEX futures. And this week, they sure bought. Producers sold -5.3k longs and increased +15.6k shorts. From the COT perspective, its a happy bullish story this week for gold. And producers got to lock in prices for gold where they actually might be profitable.

In silver, Managed Money increased +3.4k longs and covered -4.3k shorts. Producers sold -192 longs and added +2.7k shorts. The move this week in silver was more than 50% short covering, which to me is not as positive as in gold. This is reflected in the charts of both metals: silver remains below its 200 MA, while gold is now comfortably above it.

Looking forward, I see that Managed Money short interest has been reduced to levels associated with PM price cycle highs; this relatively low short position may explain why gold's momentum looks to be slowing down.

This week gold rose to briefly close just above the 1300 round number, and then fell back. While gold in other currencies rose fairly dramatically, gold in dollars made much less progress.

Moving averages for both metals continue to improve. Gold's 200 MA has now turned from down to flat. If the uptrend in gold continues, we can look forward to an eventual golden cross - but that is probably several months in the future. The gold/silver ratio dropped -1.37 to 70.62, well below its 50 MA and now is increasing its bullish look. GDX:$GOLD started falling, signaling a possible top in the current PM cycle, while GDXJ:GDX is looking positively bearish and appears headed for new lows. Ratios suggest a high may have been made in gold's current daily cycle, while the averages point to steady improvement in the longer term trends.

Physical demand is neutral this week; Shanghai premiums are flat, and ETF premiums are mixed.

Commodity prices fell this week, erasing any hope of an imminent rebound; oil too has continued dropping. Dollar strength is probably just too much for commodities priced in dollars.

Equities got a shot in the arm from Euro QE, bonds remain bullish, the Euro's drop is accelerating, and gold's long term trend is slowly approaching neutral - and that trend is now positive for gold in many other currencies.

Yet the usual pattern is for moves to happen in cycles - two steps forward, one step back, and based on the miner ratio I think gold may well take a step back in the next few weeks. The Syriza win in Greece appears to be generally accepted - Eurozone leaders are already trying to make nice (in public, anyway) and so my feeling is that the Syriza win is already baked into the current price of gold as well.

Likewise, the ECB QE program is now understood. The near term bullish drivers for gold have run their course. This ties in with what the ratios are telling me. As a result, I believe gold may take a break for a while here until something new happens.

In the very long term - years - the future price of gold is closely tied to the method of resolving the west's massive debt overhang. We may now be approaching the first step in that resolution process. Next week, Greece will finally have a government with real negotiating credibility. How long will this first step take to play out?

Along with the prospect of real helicopter money (QE is "so 2012"), true debt forgiveness may become a new popular meme. That's great if you're a debtor. Its substantially less great if you are a creditor...

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6 Comments

Thanks DaveFairtex for your continuing series of helpful commentaries. Two of your remarks trigger the following questions.
Can you point me to a chart or to historical data that I can use to track the association of an index for the junior gold miners and the spot price for gold over a series of decades? As an investor I see the miners representing a distinctly different set of opportunities and risks (in terms of buying their stocks), compared to the gold/silver ETFs.
I see these as regular companies that I would expect to turn profits and perhaps pay dividends, and I would invest according to how I view the sector and individual companies in this context. If the spot price trend reflects a revaluation of gold as a storehouse of value and a safe haven, I can see new long-term support for gold that is not reflected in the stocks of the gold mining companies unless there is a corresponding revaluation of their prospects to generate profits and dividends.
Here's my second question. Suppose the big PM traders (exclude the banks here -- they have their "special daily mission" in that market) decide that the Greek election results will be the time to take their gold/silver profits, how far down and for how long will their particular selling pressure be able to crash prices?
I would welcome their crashing of the prices as a great buying opportunity in a class of financial assets where huge long-term buying pressure is building, as more institution leaders and the general public get better educated about bank performance and reliability in terms of their impacts of peoples' bank deposits. I feel that already unfolding events will serve to drive Western society toward becoming more like India as regards cultural appreciation of the value of owning PMs as storehouses of value, regardless of what is happening to spot/futures prices on the markets.

If the Big Boys crash gold and silver prices next week to take profits after the Greek election, where do you think the bottom on silver will be? This question has no assuredly correct answer; but I bet that a high percentage of traders/investors in PMs and their ETFs think about it.
Here's this Newbie's theoretical answer, which will lead to a key practical question. In theory, there is no fixed bottom price; because everything depends on where the crash starts and how long (in terms of price change) the selling force can overwhelm the buying force before a new balance between these two forces is established. (This means you should analyze your historical data to estimate percentage changes in periods when selling force was predominant over buying force in a major way. Then apply your estimated central tendency of the historical percentage changes to the price where you think the next crash will start.)
In the case of silver, however, industrial usage will entail an economic catastrophe if the expected prices for physical silver fall below cost of production for a period long enough to trigger major mine closures. Thus my second question: can you point me to some literature where very experienced people estimate what these "mine-closing" prices would be in today's dollars? The mine-closing price range may have a top value far below $18 (spot); but it's still a good range to know in setting up portfolio protection strategy.

In corrections, I don't pick bottom prices, I look for market behavior to give me a clue as to where the buyers start to appear.

Likewise, I don't assume some big guy is looking to crash prices - I assume traders are just looking to ring the cash register at/near the top of the recent cycle. Whether that really is the top of the cycle depends on the enthusiasm of the buyers.

RIght now, I'm guessing there aren't going to be any major catalysts for gold in the near future, so buying interest will likely die down for a bit. I'm guessing that traders bought in anticipation of Euro QE and Greece. Now that those two outcomes are known, buying does seem to have dried up a bit. Miners have been selling off for the past 3 days. They tend to lead - not always, but often enough to be useful as an indicator. Sometimes they head-fake too; nothing ever works 100%.

How long will selling continue? I don't know. I just watch and see where the selling stops happening. And, the miner signal could be wrong. Something exciting could happen next week, and gold could take off like a cat with his tail on fire. News trumps technicals, if the news is big enough. SNB de-peg was one such event.

Last point. "Buy the dips" only works if you're in an uptrend. If gold breaks 1170 to the downside during this correction, gold isn't in an uptrend any longer, because it will have broken the pattern of higher lows. Ideally gold will hold above the 200 MA, but more likely, I'll be happy to have it hold at the 50. The higher the market finds support, the more enthusiastic the buyers are. We won't know how enthusiastic they are until the correction plays out.

I don't worry so much about the cost of mining, for shorter term cycle analysis, which is what this is.

Thanks a lot, DaveFairtex -- very useful! I will be looking to forecast the 'trend of the day' on Monday after London has been open for a few hours. Relying on your info., I would guess is that, barring some new big event not now in the major speculators' heads, going forward we will be seeing 1%-or-so moves at best (and often much less) over 1 to 2 day periods in the linked ETFs. This will make it very hard to make decent trading money after you get whacked by commissions and the bid-ask spreads. All this is guessing, of course.

I've been tracking the "policy whack" that spot silver often gets near 9:30AM (or later in the afternoon if buyers get too "bold") , and it often means a sudden 1% or so down-shift in the bid price on SLV. (It was exciting to see the buyers gradually wipe out Friday's down-shift.) What the "policy whacks" have not achieved in the past week-plus is altering the underlying short-term up-trend curve created initially in London.

However, I see you saying that big traders may simply have been holding off going after profits until after the Greek vote. When they do line up with the "policy whackers" (the guys making those steep over-the-cliff price drops almost daily) we will get some saddening curve patterns; though great buying opportunities may turn up! Keep your powder dry!

The not-quite-blowout Syriza victory in Greece was followed by a sell-off in PM. This confirms my concern that a Syriza victory was largely baked into the gold-price cake on Thursday & Friday. It looks like we correct for a bit now. How far we drop, I'm not sure.

I also see that the Euro marked a low at 110.96 early in Asia trading, and hasn't looked back since. It makes sense that the Euro rebound had to await the election in Greece - dollar shorts (Euro longs) had to be thoroughly demoralized before a bounce could occur.

A topping dollar might help oil to rally.

Once the Greek government actually gets formed, I expect some volatility as the two sides jockey for position. If the new Greek PM has the backing to simply default - why not, any country can default - he holds the strong hand going into the negotiations.

In a paper published last November, the party’s chief economist, John Milios, suggests that a new debt conference should write down all euro-zone public debt over 50 per cent of GDP – more than €4 trillion. Under his plan, the European Central Bank would buy up all debt above the 50 per cent threshold and convert it to zero-interest bonds which would be repaid by creditor governments over many decades.

Thanks for your comment, DaveFairtex. Regarding the sell-off on Monday, in addition to the profit-taking aspect, I learned on the weekend that the Big Boys had tended to downplay the financial-system implications of a pro-Left victory because now the Greek debt was owed to IMF and ECB. The argument is that these guys can print money freely, and thus write off all the Greek debt (ignoring the political hurdles for a moment).
Looking back at trading today and yesterday (Monday), I see the profit-taking as being far more a whimper than a bang. After you factor in the obligatory “policy whack” on the gold spot price that takes place about 9:30AM (and my volume tracking suggests another one took place Monday afternoon near 2:00PM), it looks like the profit-taking traders managed to pull off a maximum 1% down-shift in price levels. Big deal!
I now want to find time to go back many years to see how large a dent such profit-taking episodes tend to have made in prices when the underlying trend was a flat or up, with support from the related economic and political developments. It would be an important discovery if I found that we can usually wait about a day or so and we will see that the effects of traders' profit-taking will be hard to find, as we are now seeing this week.